Can a Private Company Issue Stock
Can a private company issue stock? Yes, but they do not trade on public exchanges and are not held to the SEC's filing requirements for public companies.3 min read
Can a private company issue stock? Private companies can issue stock and have shareholders, but they do not trade on public exchanges and aren't held to the Securities and Exchange Commission's (SEC) filing requirements for public companies.
What Is a Private Company?
Private companies, or privately held companies, including millions of individually owned businesses in the U.S. In fact, all companies in the U.S. begin as privately held companies.
There are five types of private companies, all of which have different rules for shareholders, assets, liabilities, and taxation.
- Sole proprietorships are held by one individual owner, including all assets, liabilities, and financial obligations.
- Partnerships are held by at least two owners, including all assets, liabilities, and financial obligations.
- Limited Liability Corporations (LLCs) are held by multiple owners who share ownership and have limited liability without being required to incorporate.
- S Corporations are held by no more than 100 shareholders and aren't taxed on their profits.
- C Corporations are held by an unlimited number of shareholders but are subject to double taxation.
A private company can issue stock and have shareholders. It's issued without undertaking the high costs of an initial public offering (IPO). Some companies stay private because IPOs are expensive to set up, with fees owed to the SEC, Financial Industry Regulatory Authority (FINRA), and stock exchange listings, among others. Some may also stay private to keep family ownership.
Issuing Private Stock in Your Company
Private companies can raise money using bank loans and some equity funding, but private stock offerings are an alternative means of equity financing. These offerings are attractive because they offer more control than IPOs. Issuing stock in your privately held company is a proven way to raise capital, but you also give up sole ownership to your investors.
To offer private stock, the first step is deciding the value of each share. The value of private shares is difficult to determine because private companies aren't required to release financial statements and reports annual reports to shareholders on a regular schedule.
The best way to figure out the value is by obtaining an independent business valuation using a reputable business valuation company. Getting a second valuation from another company allows you to compare values.
After deciding the value of each share, you must choose the type of private stock to offer:
- Private placement offerings, also known as Regulation D, limit a company to raising less than $1 million. There are also rules about the number and type of investors allowed in the offering.
- Limited partnership offerings are only used by companies organized as limited partnerships. C or S corporations can't use this offering type.
- Selling small corporate offerings to an unlimited number of investors is possible. This offering also allows a private company to use marketing tools to look for investors.
If an investor chooses to sell their shares, they may have difficulty finding buyers for their shares because private companies aren't listed on an exchange. If they do secure a buyer, the sale is subject to SEC regulations even though it is for a privately held company. Some private companies offer buyback programs to their investors, enabling them to sell their shares back to the issuing company.
Issuing Uncertificated Shares
Like public companies, many private companies have replaced paper stock certificates with a Direct Registration System (DRS), which registers shares electronically without issuing a physical certificate to serve as evidence of ownership.
Depending on where the company incorporated, there are several advantages to switching to direct registered, or uncertificated, shares.
- Companies don't need to issue stock certificates and get signatures from recipients as proof of receipt. Instead, an email to the shareholder provides written notice containing all the relevant information.
- Because the shareholders can't sell or transfer their certificates without the company's knowledge, the private company can act as their own transfer agent.
- Uncertificated shares are easily recorded, documented, and verified with software.
- Some companies allow shareholders to turn in their hard copy certificates and replace them with uncertificated shares. However, if a company chooses to skip that step, most DRS software allows companies to track existing certificates using the same system.
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